Overcoming Investment Fear – Use a Mechanical Approach

We build investing models. They provide us with simple Buy, Sell, Cash signals. We let the signals guide our investing, buying and selling as the signals dictate. We take this approach because we know that investing is more about managing our emotions than anything else. By deferring to the output of a tried and true investment model, we remove our emotional attachment to our investment, the news, our biases, et al. The excerpted article below, from Nick Maggiulli and the blog Of Dollars and Data, speaks well of the interaction between fear (e.g. emotion) and evidence (e.g. fact). We choose evidence to drive our models and investing. It has served us very well for almost two decades now at our investment websites: TimingCube, FP Research, and TradeGuru.

Take it away Nick:

A war is currently being fought every day throughout the world. This war was here before you were born and will be around long after you are gone. I am talking about the war between fear and evidence. While humanity has access to more information today than any point in human history, facts continue to fall flat in the face of compelling narratives that rely on emotional appeal, especially fear. As The Science of Fear summarized so well:

Fear sells. Fear makes money. The countless companies and consultants in the business of protecting the fearful from whatever they may fear know it only too well. The more fear, the better the sales.

I completely agree. Humans are wired to respond to stories that rely on emotions, not cold, abstract numbers. The fact remains that it is far easier to relate to the death of a celebrity than it is to the deaths of thousands of people from a natural disaster on the other side of the planet. You don’t feel like you know those thousands like you “know” that celebrity. Or as Joseph Stalin so infamously said:The death of one man is a tragedy, the death of millions is a statistic.

Despite our hard-wired tendency to react to emotional appeal, we can fight back. How? Evidence. Though fear is winning the war, everyday a small group of people win a few more battles using evidence. As I stated last week in Phil Huber’s post about evidence-based investing:

Fear is loud. Evidence is quiet. Listen to the evidence.

For example, consider the following “quiet” evidence:
• Since 1983, over 95% of passengers involved in a plane crash in the U.S. have lived to tell their tale.
• Somewhere between 70 and 80% of all gunshot victims survive their shooting.
• 165 people lived through the atomic bombing of Nagasaki after surviving the bombing at Hiroshima 3 days prior.
• Bill Gates calls the image below “the most beautiful chart in the world” (I couldn’t agree more):

And these are just a few examples of the overwhelming evidence that our biggest fears are not as bad as they seem and that human life is generally improving around the world. If you need more convincing, read Morgan Housel’s What A Time To Be Alive.

So, how is this related to investing? This is the primary goal of evidence-based investing (EBI) — to purse investment strategies backed by data and facts rather than narratives and emotion. EBI is about favoring history over uncertainty. Or, as my favorite investing quote of all time states:

Fear has a greater grasp on human action than does the impressive weight of historical evidence.
-Jeremy Siegel

Read that quote again. Seriously. Let it sink in. Now, consider what Warren Buffett said regarding a similar subject:In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Do you feel the impressive weight of evidence crushing your fear? You should. If not, I can probably guess your counter argument. What about the Black Swan? The nuclear war? The apocalypse? What if Nassim Taleb is right? He might be, but it wouldn’t matter anyways. If the apocalypse happens, your financial assets are irrelevant. So, who cares? Anything else though, our society and financial markets will survive. Terrorist attack? Hurricanes? Pandemics? These are all awful, but we’ll be fine.

Back here at TimingCube, we do not have to worry about the constant din of noise and news impacting our investments. News (and noise) mingles with company fundamentals and investor sentiment to impact price which drives our models. The prices of stocks are fact, evidence, and what drives our investing. Not news flow, opinion, and the resulting fear.

Market Update

Stocks continued their slow grind higher this week with tax reform being top of investor’s minds. Monday saw a -0.3% dip despite a strong showing from Apple (AAPL) as reports emerge that demand for its $1000 iPhone X is outstripping supply. Tuesday brought a winning month of October to a close with a +0.1% gain. Strength in food producers Mondelez (MDLZ) and Kelloggs (K) on healthier earnings helped the market; while Intel (INTC) continued its move higher on rumors that Apple might use the chipmakers products in future iPhone iterations. A mixed day Wednesday with little news other than the Fed meeting statement which offered nothing new, as expected; the S&P 500 added +0.2%. Stocks dipped early Thursday on initial details of the House of Representatives’ tax reform proposal. However, buyers quickly stepped in to bring stocks back to even on the day. The nomination of Jerome Powell to be the new Fed Chief was widely expected and had no noticeable market impact. Apple’s earnings news Thursday night set the stage for a positive session Friday. The monthly jobs report did nothing to change the market tone, with the report being consistent with recent trends. Apple closed the post-earnings session up +2.6% to push the Nasdaq higher by +0.7%.

For the week, the S&P 500 (SPY) added +0.29% while the Nasdaq (QQQ) enjoyed Apple’s positive push to a +1.34% gain. Small-cap stocks continued their relative struggle losing -0.79% for their fourth straight week stuck between 148 and 150 (on the IWM).